Seeking Alpha's healthcare quant picks ahead of Q3 earnings: McKesson, Incyte top-rated stocks

[Health Care Medical Stock Market Industry Sector Wall Street Buildings 3d Illustration]
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The Health Care Select Sector SPDR® Fund ETF (NYSEARCA:XLV [https://seekingalpha.com/symbol/XLV]), which tracks the health care sector, and holds a weightage of 12.12% in the S&P 500 index, rise 3.18% so far this year, compared to 13.14% rise in the broader benchmark index (SP500 [https://seekingalpha.com/symbol/SP500]).

Q3 sector performance was led by large gains in Technology (XLK [https://seekingalpha.com/symbol/XLK]) at +12.3%, and strong returns from Communications (XLC [https://seekingalpha.com/symbol/XLC]) and Consumer Discretionary (XLY [https://seekingalpha.com/symbol/XLY]), both at +9.8%. Meanwhile, Consumer Staples (XLP [https://seekingalpha.com/symbol/XLP]) lagged significantly with a -4.4% loss, and Health Care (NYSEARCA:XLV [https://seekingalpha.com/symbol/XLV]) posted a minimal 1.80% return.

According to FactSet, the market is broadly positive, with seven of eleven sectors expected to report year-over-year earnings growth. Leading this expansion are the Information Technology, Utilities, Materials, and Financials sectors. The remaining four sectors are projected to show an earnings decline, led by significant drops in the Energy and Consumer Staples sectors.

With Q3 earnings kicking off, we look at the sector’s performance and where its constituents stand on the rating system.

The XLV ETF fares well on several key metrics [https://seekingalpha.com/symbol/XLV/ratings/quant-ratings], earning an A+ score for dividends, expenses, and liquidity. However, ETF’s current performance is undermined by poor market mechanics, reflected in its low ratings of (D-) for risk/volatility and momentum.

WHAT QUANTITATIVE MEASURES SAY

SA's Quant gave the healthcare sector an overall health score of 3.19 out of 5 with a Hold rating. Ratings under the Quant system are based on quantitative indicators like valuation, earnings growth, and past stock performance.

With Q3 earnings around the corner, Quant marked 6 firms out of the 60 individual stocks as "buy" or higher, while 50 stocks were considered "neutral." Furthermore, the sector scored 3.66 in terms of what the analysts think, with about 47 stocks as a "buy" or higher.

TOP-RATED HEALTHCARE STOCKS:

According to Quant Ratings, three companies are leading the healthcare sector with "Strong Buy" recommendations: McKesson (MCK), Incyte (INCY), and Boston Scientific Corporation (BSX).

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McKesson (MCK), with a score of 4.80, is underpinned by exceptional metrics, including an "A+" for Profitability and an "A" for EPS Revisions.

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Incyte (INCY) scored 4.68, boasting top marks for future prospects, including an "A+" for Growth and an "A" for Profitability.

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Boston Scientific (BSX), rated 4.67, earned its "Strong Buy" primarily through its industry-leading "A+" for Profitability, despite lower marks in Growth (C) and Momentum (C-).

HEALTHCARE STOCKS WITH HOLD RATING:

In contrast, 50 major healthcare companies, including CVS Health (NYSE:CVS [https://seekingalpha.com/symbol/CVS]), UnitedHealth Group (NYSE:UNH [https://seekingalpha.com/symbol/UNH]), Pfizer (NYSE:PFE [https://seekingalpha.com/symbol/PFE]), and Johnson & Johnson (NYSE:JNJ [https://seekingalpha.com/symbol/JNJ]), received neutral "Hold" ratings with Quant scores ranging from 2.55 to 3.47 [https://seekingalpha.com/symbol/JNJ].

HEALTHCARE STOCKS WITH SELL RATING:

The Seeking Alpha Quant system assigned a "Strong Sell" recommendation to three healthcare stocks—Align Technology (NASDAQ:ALGN [https://seekingalpha.com/symbol/ALGN]), Revvity (NYSE:RVTY [https://seekingalpha.com/symbol/RVTY]), and Bio-Techne (NASDAQ:TECH [https://seekingalpha.com/symbol/TECH])—giving them the lowest overall scores in the sector (1.27, 1.41, and 1.48, respectively). The system's analysis showed that:

* Align Technology (NASDAQ:ALGN [https://seekingalpha.com/symbol/ALGN]) suffers from significant "F" grade weakness in growth, despite slightly better momentum (D-) and valuation (B-) scores.
* Revvity (NYSE:RVTY [https://seekingalpha.com/symbol/RVTY]) was flagged for poor growth ("B+") in combination with strong profitability ("A") and momentum (D+).

INDUSTRIES Q3 PERFORMANCE

The Health Care Select Sector Index includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology.

The Health Care Equipment & Services sector rose 2.48% in Q3, while Pharmaceuticals, Biotechnology and Life Sciences rose 5.21% in Q3.

WHAT ANALYSTS EXPECT

SA contributor wrote [https://seekingalpha.com/article/4822422-xlv-market-overreaction-could-drive-double-digit-shareholder-yield], "The healthcare sector has historically lagged the S&P 500, a trend driven by market uncertainty surrounding its long-term revenue and profit outlook. However, a recent dip in stock prices is seen as a buying opportunity. The sector ETF, XLV, has thus been assigned a "Buy" rating, with analysts forecasting a 16.27% return."

Another SA contributor wrote [https://seekingalpha.com/article/4817656-xlv-vs-ihe-will-pharmaceuticals-outperform-healthcare], "IHE is focused on pharma, which may be promising short-term, but healthcare generally offers better long-term returns. Both IHE and XLV have similar valuations, but XLV's current underperformance makes it more appealing to buy now."

RELATED ETFS: Health Care Select Sector SPDR Fund (NYSEARCA:XLV [https://seekingalpha.com/symbol/XLV]), SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH [https://seekingalpha.com/symbol/XPH]), VanEck Pharmaceutical ETF (NASDAQ:PPH [https://seekingalpha.com/symbol/PPH]), iShares Nasdaq Biotechnology ETF (NASDAQ:IBB [https://seekingalpha.com/symbol/IBB]), iShares U.S. Pharmaceuticals ETF (NYSEARCA:IHE [https://seekingalpha.com/symbol/IHE]), and Invesco Nasdaq Biotechnology ETF (NASDAQ:IBBQ [https://seekingalpha.com/symbol/IBBQ]).

MORE ON THE HEALTH CARE SELECT SECTOR SPDR® FUND ETF

* XLV: Market Overreaction Could Drive Double Digit Shareholder Yield [https://seekingalpha.com/article/4822422-xlv-market-overreaction-could-drive-double-digit-shareholder-yield]
* XLV Vs. IHE: Will Pharmaceuticals Outperform Healthcare? [https://seekingalpha.com/article/4817656-xlv-vs-ihe-will-pharmaceuticals-outperform-healthcare]
* XLV: Life Expectancy, Patents, And A Positive Outlook Will Pave The Way [https://seekingalpha.com/article/4801594-xlv-life-expectancy-patents-and-a-positive-outlook-will-pave-the-way]
* Notable healthcare headlines for the week: Novo Nordisk, Bristol Myers Squibb and J&J in focus [https://seekingalpha.com/news/4503400-notable-healthcare-headlines-for-the-week-novo-nordisk-bristol-myers-squibb-and-jj-in-focus]
* Generic drug imports unlikely to face tariffs - report [https://seekingalpha.com/news/4502853-generic-drug-imports-unlikely-to-face-tariffs]